Overview
Innovation in the universe of finance has exploded in the last few years, with the recent coronavirus pandemic only feeding fuel to the fire of worldwide digitalization. With the change in people’s sentiments about financial technology or “FinTech” and the acceptance, adoption, and promotion of the same, especially by the not-so-techy sections of society, things are starting to take a turn.
FinTech, undoubtedly, is an inevitable step towards making financial services faster, simpler, more reliable, and of course, more user-friendly. But as we have witnessed, innovation is a double-edged sword.
The same technology that enriches people’s lives can be used for criminal activities like money laundering. This is exactly what we’re going to be talking about in this article.
More specifically, the Anti-Money Laundering Guidelines to be adopted by FinTech institutions to improve compliance and accountability and help detect illicit or suspicious transactions and eliminate the same. Let’s take a look at some basic concepts before we move further.
What is money laundering?
Money laundering is essentially a form of financial crime. It’s when criminal organizations and individuals attempt to conceal the true origin of the money obtained by fraudulent or illegal methods or sources. These include:
- Bribery
- Drug trafficking
- Terrorist financing
- Corruption
- Accounting fraud
- Insurance fraud
- Theft
- Tax evasion
- Counterfeiting
- Scams
This is done by moving the dirty money (money obtained from illicit sources) into the financial system and passing it through a chain of complex banking transfers and commercial transactions–thus, cleansing or laundering the money, i.e., causing it to appear to have come from a legitimate source.
These transactions can be made for acquiring assets like real estate, loan repayments, gambling, or currency exchanges. Since the transactions made here are done with legitimate cash-focused businesses, the illegal funds are blended together with clean money making it hard to detect the origin of the same.
Needless to say, money laundering is one of the biggest global problems. According to research, a jaw-dropping estimated total of about $800 billion to $2 trillion are laundered every year. Just to give you some perspective on that number, that’s about 2-5 percent of the world’s total annual GDP.
About Anti-Money Laundering
As the name suggests, Anti-Money Laundering (AML) refers to the conglomerate of laws, policies, regulations, procedures, technologies, and strategies designed to prevent money laundering. AML programs aim to target the three stages of money laundering:
- Placement – putting the money in the legitimate financial system
- Layering – concealing the source of the illicit funds via a series of transactions
- Integration – use of the “laundered” money for funding further criminal activity
The attempts made towards Anti-Money Laundering can only be as effective as the cooperation businesses and governments are willing to exercise to prevent them, but as history is our witness, the attempts so far haven’t been as successful as we hoped.
In fact, according to a recent conspiracy, a set of classified documents known as the “FinCEN files” revealed, in the mid-Sept of 2020, how some of the biggest and most powerful banks in the world have allegedly helped crime units move illicit cash worth trillions of dollars to serve suspected terrorist groups, drug kingpins, and criminals worldwide.
Given this evident ineffectiveness of governments and organizations to prevent money laundering, inter-governmental bodies like the Financial Action Task Force (FATF) take responsibility to commit their efforts towards working with countries and corporations around the world to implement robust AML programs to improve compliance.
What does this mean for FinTech?
The fundamental purpose of FinTech is the improvement and automation of financial services to render them par with the current times and replace traditional financial service methods which are no longer sufficient to satisfy people’s needs.
FinTech solutions involve technologies such as mobile banking, mobile payments, and cryptocurrency. It is to be kept in mind that the FinTech industry, as fast as it is growing, is still in its early stages and yet to be adopted well in our society.
Given the ever-changing nature of technology and the messy and controversial world of finance, FinTech essentially has to solve the worst of both worlds, which, needless to say, is a tedious job and takes a lot of trial and error to be able to get right.
Though it’s true that FinTech has made our lives much more convenient, it’s also true that the delay in its maturity can and has led to its exploitation.
And with the adoption and promotion of cryptocurrency by an increasing number of businesses, Bitcoin and altcoins (cryptocurrencies other than Bitcoin) have become the hottest new vessel for criminals to launder massive amounts of money.
The role of crypto in FinTech and AML programs
In fact, since its inception back in 2009, Bitcoin has been responsible for an estimated total of about $4.5 billion being laundered. Out of this, about $2.8 billion were reported to have laundered in just 2019.
And due to the fact that crypto transactions are pseudonymous in nature, thanks to the blockchain (the technology that allows the existence of cryptocurrency), it becomes even harder to track the illicit transactions that take place using crypto and identify the parties involved in the same.
Comparatively, however, crypto is not as big of a contributor in money laundering as fiat money, considering how crypto transactions are immutable and leave behind a permanent unalterable trail on the blockchain network.
Money, on the other hand, leaves behind no such trail other than fingerprints (which doesn’t really help since physical currency notes are exchanged on a regular basis).
While some countries like Japan, the United States, and Switzerland are welcoming cryptocurrency with open arms, countries like India, Saudi Arabia, Nepal, and Bangladesh are still not convinced of their legitimacy and deem it unfit for the financial health of the economy.
To rectify the same, crypto exchanges like Binance have started requiring KYC details of its customers and consolidate AML programs in order to increase security, boost compliance, and prevent potential attempts of money laundering, terrorist financing, and other forms of financial crime and fraud.
While regulators can issue guidance and norms, the onus is on money service businesses to implement these guidelines in order to become compliant with regulations. They need to have a well-designed AML compliance program that includes a well-balanced combination of compliance systems and technologies in place. For example, having an in-house compliance team may be feasible only for large service providers but might be very expensive and impractical for smaller firms. This means that smaller providers will have to rely more on highly intelligent process automation tools and platforms to sift out illegitimate transactions from large data sets.
With FinTech innovations, there should be proper tools to verify the identity of people who transact in cryptocurrencies. This should include the ability to match and relate blockchain transactions with real identities, creating an end-to-end trail to help with AML investigations. This should also include monitoring tools to dig out suspicious patterns for further investigations are also essential for the AML compliance programs of solutions that utilize cryptocurrencies.
Iyan Adeendren is the Founder of GimmeGamma.
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